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Economics Question

1.The following table gives you long-run total costs for various levels of output of Consolidated National Acme, Inc.: (4 points)

Q                 TC                                                     LRATC      

 0                    0                                                0

1                   300                                             300

2                   400                                             200

3                   465                                             155

4                   495                                             123.75

5                   560                                             112

6                   600                                             100

7                   700                                             100

1. A) Calculate LRATC for each level of output and fill-in the table.
2. B) Over what range of output do you see the law of diminishing marginal returns?
3. C) Over what range of output do you see economies of scale, and why?
4. D) Over what range of output do you see constant returns to scale, and why?
5. E) Over what range of output do you see diseconomies of scale, and why?
6. F) What is the minimum level output that must be produced by this firm to achieve productive          efficiency?
7. G) Which costs are lower? Short-run or long-run total costs? Briefly explain why?

2. It is suggested that perfectly competitive firms are price takers. Although one rarely, if ever, has an opportunity to test this in the real-world, it is equally rare that the customer goes into any business establishment and tells the seller what the price is. If sellers are price takers and buyers don’t dictate price, where does price come from in perfectly competitive markets? Briefly explain. (1 point)

3. You are running a business in a perfectly competitive market. Your product sells for $5 and your marginal costs rise as output rises. (2 points)

• If the cost of producing another unit of output is $4, what should you do?
• What has happened to your profit?
• If the cost incurred from your last unit of output produced is $6, what has happened to your profit?
• What should you do about this?
• What general rule do the above examples suggest about how a firm should determine the level of output to produce so as to maximize profit?

1. d) In determining the supply curve of a perfectly competitive firm, what cost information do you need? Why do you need that information? Explain.
2. Refer to the graph below which shows a perfectly competitive firm’s demand and cost conditions.  (5 points)

1. Refer to the graph above. If market price of product is $7, the firm produces ______ units to maximize profits/ minimize loss.
2. 380          b. 500                             c. 600                                         d. 480

1. Refer to your answer above. At the profit maximizing level of output, the firm makes a total profit (loss) of $________ and the firm can expect ___________ in the long-run:

1. $500; entry b. $480; entry                      c.$ 800; entry             d. $0; no entry no exit

• C) If the market price falls to $5, the profit maximizing/ loss minimizing perfectly competitive firm will produce __________ units and earn _______________in economic profit/loss
• D) Refer to the graph above. The firm would shut down if the price falls below _________ and accept the total loss of ______

3. $3.00; -$800 b. $5.00; $760                  c. $7.00; $500          d. $2.00; $500

• E) The firm’s supply curve is:

1. The portion of ATC curve above price of $5     c. The portion of MC curve above $3
2. The AVC curve above $4                                   d. The marginal cost curve above $5

• F) In the long-run equilibrium, the firm will charge the price of _______ , produce _____units of              output, earn _____________ economic profit.

3. $3.00; 200; $600 in profit b. $5; 380; normal profit
4. $7:00; 500; -$1,000 loss d. $9, 600; positive economic profit of $600

• G) Refer to your answer above. Should the firm stay in the business or not. Briefly explain.
• H) Refer to your answer in part F. If there were 200 firms in the market, what would be the market equilibrium price and the industry output?
• I) A what significance for economic efficiency is the equality of P and minimum of ATC? The equality of P with MC? Briefly explain

5. During a coffee –room debate among several young MBA.s who had recently graduated, one of the young executives flatly stated: “The most this company can lose on its Brazilian division is the amount it has invested (its fixed costs)”. Not everyone agreed with this statement. (2 point)

• In what sense is this statement correct?
• Under what circumstances this statement could be it false? Explain?

Extra Points (3 points)

1. Discuss the following statement; “Economists need to pay more attention to the real’s world business. Their model of perfect competition predicts that firms in the market will end up earning no profit, nothing above costs. As any accountant can tell you, if you look at the balance sheet of most businesses in any industry, their revenue exceeds their costs, they do in fact make a profit.
2. Since a firm in perfectly competitive market is a price searcher, it must lower price to sell an additional unit of its product. True or false? Explain (1point)

3.Suppose you decided to open a copy store. You rent store space (signing a one year lease), and you take out a loan at the local bank and use the money to purchase 10 copiers. Six month later a large chain opens a copy store two blacks away from yours. As a result, the revenue you receive from your copy store, while sufficient to cover the wages of your employees, and the cost of paper and utilities, does not cover all of your rent and the interest rate and repayment costs on the loan you took out to purchase the copiers. Should you continue operating your business?